McKesson Corp. plans to buy Germany-based pharmaceutical distributor Celesio in a complex deal valued at $8.3 billion.

McKesson, Celesio, pharmaceutical distributor, drug distributor, John Hammergren, Paul Julian, McKesson Distribution Solutions, Marion Helmes, community pharmacies, health care, Franz Haniel & Cie. GmbH, pharmaceutical wholesale, retail pharmacy, Fitch Ratings, Walgreens, Alliance Boots, AmerisourceBergen

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McKesson to acquire global Rx wholesaler Celesio

October 24th, 2013

SAN FRANCISCO and STUTTGART, Germany – McKesson Corp. plans to buy Germany-based pharmaceutical distributor Celesio in a complex deal valued at $8.3 billion.

The agreement, announced Thursday after speculation by industry analysts in recent weeks, would unite the biggest U.S. drug distributor with one of the world's largest wholesalers and providers of logistics and services to the pharmaceutical and health care sectors.

McKession and Celesio said they will come together to form a global leader in health care services, with deep expertise in delivering solutions to pharmacies, manufacturers, patients and other customers.

Specifically, they said, the combined company will leverage its broad scale and resources to provide customers increased supply-chain efficiency and enhanced global sourcing; global distribution and logistics capabilities that bring new value and services to manufacturing partners; a wide array of innovative technology and business services; and operating best practices across an extensive distribution network on three continents.

"The combination of McKesson and Celesio will create a leading, global health care services platform that will advance our customers' ability to deliver better, more efficient health care solutions," McKesson chairman and chief executive officer John Hammergren said in a statement. "The health care industry is evolving rapidly, marked by convergence between segments and increased globalization. With today's announcement, we will bring together the strengths and expertise of each company to address global health care challenges."

The combined group will have annual revenue of more than $150 billion, 81,500 employees worldwide and operations in more than 20 countries. McKesson and Celesio deliver to about 120,000 pharmacy and hospital locations on a daily basis in the United States, Canada, Europe and Brazil, including over 11,000 pharmacies that are owned or are part of a banner or franchise network of community pharmacies.

"We are looking forward to working with Celesio's management team and employees to provide our customers with more efficient delivery of healthcare products and services around the world," Hammergren added. "Our customers — from community pharmacies to major hospital networks — will benefit from the increased scale, supply chain expertise and sourcing capabilities of the combined company, together with enhanced access to innovative technology and business services."

Plans call for the operations of Celesio to become part of the McKesson Distribution Solutions segment, led by Paul Julian, executive vice president and group president.

"The business leaders in McKesson and Celesio have built relationships with customers over many years and have a deep understanding of their own unique markets," Julian stated. "We look forward to supporting Celesio and their business leaders as they implement their currently planned strategy for growth and, ultimately, aligning our organizations more closely in the areas where we can deliver further value for our customers and manufacturing partners."

After the transaction closes, McKesson and Celesio plan to maintain their own brands and continue to support customers through current channels.

"This combination allows two market leaders with complementary geographic footprints to work together in an increasingly global market segment," commented Marion Helmes, speaker of the Celesio AG management board and chief financial officer. "Both companies have a long history of leadership in the pharmaceutical wholesale and retail pharmacy industries, and our mission and values are very similar to McKesson's. We believe that our employees, all of whom are passionate about the important role they play in the delivery of quality health care services, will benefit from being part of an even stronger international group."

Under the multifacted deal, McKesson has entered into a share purchase agreement with Franz Haniel & Cie. GmbH, the majority owner of Celesio, in which it will acquire Haniel's stake in Celesio, currently 50.01% of the company's outstanding shares. The share purchase agreement has been approved by McKesson's board and Haniel's supervisory board.

McKesson also has agreed to launch public tender offers for the remaining publicly traded shares and the outstanding convertible bonds of Celesio, as well as assume the company's outstanding debt.

In addition, McKesson has entered into a business combination agreement with Celesio that outlines the key parameters facilitating the combination of the companies. That agreement has been approved by McKesson's board and Celesio's supervisory board.

The share purchase from Haniel and the tender offers are subject to certain closing conditions, including regulatory approvals and McKesson's acquisition of a minimum of 75% of the diluted shares of Celesio.

McKesson said it expects to finish the tender offers in its fiscal 2014 fourth quarter ending March 31, 2014. The company also plans to complete during its 2015 fiscal year the steps needed to attain operational control of Celesio.

McKesson added that by the fourth year after gaining operational control of Celesio, it expects to realize annual synergies of $275 million to $325 million.

Shares of McKesson surged to a high of nearly $155 Thursday morning after closing at $143.05 on Wednesday.

Following the announcement of the deal, Fitch Ratings put McKesson on a negative rating watch, noting that the acquisition will increase the company's debt load, already elevated after closing its $2.1 billion agreement to buy of PSS World Medical Inc. earlier this year. Still, the rating agency called the deal a positive move for McKesson.

"Fitch views the proposed acquisition of Celesio by McKesson as strategically sound, as it offers the potential for better buy-side drug pricing and additional growth opportunities outside the largely penetrated U.S. market. The realization of these benefits, however, is likely to take several years. Fitch sees relatively few financial synergies in the near term," the ratings firm stated.

In the pharmaceutical wholesale and retail sector, the partnership between Walgreen Co., Alliance Boots and AmerisourceBergen is creating a greater sense of urgency among major players to not just boost scale but also to explore international growth, according to industry observers. Yet Fitch cited key differences between that partnership and the McKesson-Celesio deal.

"McKesson's proposed acquisition of Celesio is differentiated from the March 2013 announcement of a strategic, long-term relationship among U.S. drug distributor AmerisourceBergen Corp., U.S. drug store chain Walgreen Co. and European drug distributor Alliance Boots," Fitch explained. "AmerisourceBergen will likely share the benefits of buy-side cost savings and non-U.S. growth prospects with Walgreens — now its largest customer and expected to become its largest shareholder — and Alliance Boots. Conversely, McKesson will solely benefit from these tailwinds, but will also bear fully the risks associated therewith. The overall relative benefits of these two divergent globalization schemes are not yet able to be ascertained, and each will take quite some time to be fully realized."